It’s tax season, meaning that somewhere out there at this very moment an accountant is smiling. The IRS has made some changes to its personal income tax returns (1040s), the form most Americans use to file their taxes.
The goal was to simplify a form that was several pages long. Whether they accomplished this goal might depend on who you ask and how you ask the question. They definitely didn’t accomplish their stated mission of getting it down to the size of a postcard. There’s also at least one change in actual tax policy that may affect both your return and your mortgage.
But just what’s changing and what are its effects on people who might be looking to apply for a mortgage in the near future? Let’s take a look and see what’s happening.
Basically, instead of having Form 1040, 1040A and 1040EZ, there’s going to be one Form 1040. Most of it is the same except that some things have been combined or moved to other schedules.
Schedules are items the IRS has you attach to your tax return if you have additional tax liability calculations that aren’t covered on the main form. For example, one covers additional income and income adjustments, while others deal with refundable and nonrefundable tax credits.
Several of the items that used to be on the main 1040 but have been removed are now parts of Schedules 1 – 6 (new this year). These join forms that were already separate from the main 1040 in the past (e.g., Schedule C, commonly filed by self-employed persons). And this was about simplification?
We kid, but the fact of the matter is that most people won’t notice any difference. According to one recent article, 89% of filers use tax preparation software. It’ll just be the usual process of filling in the blanks.
If you want to get a look at the new form, here’s a blank 1040.
Will Any of This Impact My Tax Return?
Although a lot of the changes to the forms are cosmetic in nature, we wanted to highlight a couple of things that could impact your return.
Previously, in certain cases, people were allowed to deduct expenses for business that weren’t paid for by their employer (e.g., gas mileage or a headset for work). These were referred to as unreimbursed business expenses (URBEs). To qualify, the deductions had to be more than 2% of an employee’s adjusted gross income (AGI).
Although these deductions technically still exist, they’re only available for certain qualified people (e.g., teachers and disabled individuals with impairment-related work expenses). The old deduction that applied to everyone for expenses above the 2% threshold is no longer available. For some, this could negatively impact their refund.
How Do the 1040 Changes Impact My Mortgage Application?
Because some things are being combined or no longer exist under this new form structure, your mortgage lender will likely request more paperwork from you. However, the biggest change has to do with URBEs.
Unreimbursed Business Expenses Are Changing
Previously, business expenses that weren’t reimbursed by an employer had to be counted against your monthly income for mortgage qualification purposes. Because it’s not reported on 2018 tax returns, we’re only looking at URBEs through your 2017 return.
The mortgage investors Fannie Mae and Freddie Mac have stated they won’t factor in URBEs going forward. Others have yet to provide official guidance. Your lender will guide you.
Documentation for IRAs, Annuities and Pensions
In its zeal to condense the 1040 form, the IRS has put IRAs, annuities and pensions into a single line item. For the taxpayer, this really has no practical impact beyond combining the individual lines under the same umbrella.
However, if you wanted to use any of these accounts or annuities to qualify for a mortgage, your lender may or may not now need slightly more paperwork in the form of statements and other items because income from an IRA isn’t treated the same way as income from an annuity, etc. It just means slightly more paperwork preparation, but your lender can walk you through it.
It’s worth noting that some investors required this paperwork already, so you would see the change only with conventional loans. Meanwhile, sometimes it’s as simple as providing a 1099 form for your pension.
Hopefully this helped you understand some of the major changes to your taxes and tax forms. This was intended to be general advice, so if you have questions about your particular situation, we suggest you consult a tax advisor or the IRS helpline at (800) 829-1040.
If you happen to be ready to buy or refinance a home, you can apply online or give us a call at (800) 785-4788.
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